Patience bears fruit

The duration factor is often left out of the discussion about risk and returns. Yet institutional investors’ taste for long-term assets explains why LPs exposed to infrastructure are now eying agriculture.

Conference attendance is often a bellwether of investor interest in a given asset class. And telling statistics are not limited to total headcount – how an audience’s composition evolves matters a lot, too.

By such standards, an anecdote shared with us recently by Noel Kullavanijaya, a principal at Equilibrium, holds promise for agriculture. Every year, the real assets platform holds an annual forum attended by about 80 investors (out of a 125-strong audience). A few years ago, institutions only represented a quarter of LPs present, the bulk being made up of family offices, NGOs and high-net-worth individuals. But today, these proportions have reversed.

“What that means is that the institutions are recognizing that they can put large dollars to work,” Kullavanijaya says.

For institutions with a large kitty to spend, being able to sign big equity checks matters. In the case of agriculture, however, another factor is probably just as important. “People think about risk and return, but they don’t think enough about duration,” Kullavanijaya notes. In an environment where safe assets yield very little, entities with lots of money to invest would rather not see it come back anytime soon.

That’s certainly the case with many sovereign wealth funds, endowments and foundations, which theoretically have infinite durations. But it’s also true of most pension funds, for which liabilities tend to average 40 or 50 years. It is therefore not surprising that institutions attracted by the high-yielding, long-term characteristics of infrastructure should be looking to diversify by exploring agriculture.

A fund currently being raised by Agriculture Capital, an Equilibrium affiliate, provides a case in point. Launched last year with a $400 million target, the vehicle has since received commitments from the Public Employees Retirement Association of New Mexico, the Ohio Police and Fire Pension Board, the New Mexico State Investment Council and the Maine Public Employees Retirement System – all of which have previously pledged to infrastructure funds, some on a repeat basis.

Seen through this prism, the ACM II example yields other lessons. Like infrastructure, agri is seeing diminishing returns in its safest corners, impacted by a double whammy of low commodity prices and battered land values (at least in the US).

But ACM II focuses on permanent crops – the likes of which take several years to bear fruit, but generate solid returns once they do. The vehicle is aiming for 11 percent net returns (out of 13 to 15 percent gross IRRs) with a net equity multiple of 2.4 times, according to LP documents. It also seeks to capture part of the premium that comes with vertical integration: while 75 percent to 80 percent of the vehicle is set to be invested into producing acreage, the balance will target midstream packing, processing and storage assets. The underlying assets have long durations: “A fruit tree, well maintained, will bear fruit for 70 years,” Kullavanijaya observes.

Such characteristics are reminiscent of greenfield infrastructure, through which patient investors can hope to reap a premium by seeding the construction of long-term assets. Which prompts another question: what happens to the assets once the fund matures? ACM Permanent Crops, Agriculture Capital’s debut vehicle, has a 10-year term (with a two-year extension); presumably some LPs will be interested to hold the assets after it expires. It’s probably too early to speak of agriculture secondaries – but the ground, it seems, is being prepared.

Write to the editor at matthieu.f@peimedia.com